The relationship between housing supply and affordability isn’t just a matter of economic theory. A great deal of evidence links the supply of space with the cost of real estate. Simply put, the places that are expensive don’t build a lot, and the places that build a lot aren’t expensive. Perhaps a new 40-story building won’t itself house any quirky, less profitable firms, but by providing new space, the building will ease pressure on the rest of the city. Price increases in gentrifying older areas will be muted because of new construction. Growth, not height restrictions and a fixed building stock, keeps space affordable and ensures that poorer people and less profitable firms can stay and help a thriving city remain successful and diverse. Height restrictions do increase light, and preservation does protect history, but we shouldn’t pretend that these benefits come without a cost.

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The cost of restricting development is that protected areas have become more expensive and more exclusive. In 2000, people who lived in historic districts in Manhattan were on average almost 74 percent wealthier than people who lived outside such areas. Almost three-quarters of the adults living in historic districts had college degrees, as opposed to 54 percent outside them. People living in historic districts were 20 percent more likely to be white. The well-heeled historic-district denizens who persuade the landmarks commission to prohibit taller structures have become the urban equivalent of those restrictive suburbanites who want to mandate five-acre lot sizes to keep out the riffraff. It’s not that poorer people could ever afford 980 Madison Avenue, but restricting new supply anywhere makes it more difficult for the city to accommodate demand, and that pushes up prices everywhere.

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Most people who fight to stop a new development think of themselves as heroes, not villains. After all, a plan to put up a new building on Madison Avenue clearly bugs a lot of people, and preventing one building isn’t going to make much difference to the city as a whole. The problem is that all those independent decisions to prohibit construction add up. Zoning rules, air rights, height restrictions, and landmarks boards together form a web of regulation that has made building more and more difficult. The increasing wave of regulations was, until the Bloomberg administration, making New York shorter. In a sample of condominium buildings, I found that more than 80 percent of Manhattan’s residential buildings built in the 1970s had more than 20 stories. But less than 40 percent of the buildings put up in the 1990s were that tall. The elevator and the steel-framed skyscraper made it possible to get vast amounts of living space onto tiny amounts of land, but New York’s building rules were limiting that potential.

What do I take from this? Density is a great thing - agglomeration effects are real. But when you force it by artificially restricting land supply, you push up land prices everywhere else. Height restrictions in the CBD push up land prices elsewhere in town. Further, while agglomeration effects are real, the only potential market failure justifying coercion is coordination. Otherwise, the agglomeration effects are largely internalized by the firms in the dense area. Nobody has to force Wall Street firms to be located on Wall Street; that the choose to be there instead of other places shows that they value those density-related amenities.

But coordination doesn't require coercion! The folks putting together the EPIC technology park got together and themselves decided that they all wanted to share a venue before sorting out with Council where it could be located. At most, Council could put up a few public amenities that would act as Schelling points for a few types of development.

As for transport strategies relying on rail to ease congestion, why not go for the low-hanging fruit first? Congestion charging!

The most cost-effective means of opening up overcrowded city streets would be to follow Singapore and charge more for their use. If you give something away free, people will use too much of it. Mumbai’s roads are just too valuable to be clogged up by ox carts at rush hour, and the easiest way to get flexible drivers off the road is to charge them for their use of public space. Congestion charges aren’t just for rich cities; they are appropriate anywhere traffic comes to a standstill. After all, Singapore was not wealthy in 1975, when it started charging drivers for using downtown streets. Like Singapore, Mumbai could just require people to buy paper day licenses to drive downtown, and require them to show those licenses in their windows. Politics, however, and not technology, would make this strategy difficult.

The draft city plan has a $400 million rail line connecting downtown to the University campus. It's unclear that there's sufficient demand to justify such investment, but there might be on the City's creation of a proposed new international precinct downtown where international students would be invited to live. Those students currently live within walking distance of campus in a vibrant international hub at Church Corner and Riccarton where I can find great Chinese, Vietnamese and Korean food; Korean butchers and grocers; a Japanese bakery; and, all kinds of other diverse amenities (Korean and Chinese churches, etc). To the extent that the city is successful in moving all the students downtown (from where they'd need public transport to get to University, and so would need the $400 million dollar (more than $3k per household) rail line (or a far far cheaper designated busway), it would be by destroying an existing international hub.

Let's work through some numbers on rail. Suppose that the $400 million is financed through a 25 year bond issue paying 8%. For an annuity paying 8% to have a present value of $400 million over 25 years (in other words, for folks to be willing to give the City $400 million today in exchange for bonds), the annual payment has to be $37.47 million. The building costs alone for the rail line are then $103k per day for the next 25 years. And, suppose further that we're willing to subsidize each rail rider by $10 per ride. We'd then need 10,000 people riding the train every day just to cover the capital cost where we're willing to pay $10 per person per ride. By way of comparison, RedBus, which services most of Christchurch, carries 5.8 million passengers per year - an average then of just under 16,000 passengers per day. If a single rail line from downtown to the University carried as much traffic as the entire RedBus network, the effective per-passenger capital cost subsidy would be $6.50. If the train were running on a cost recovery basis, it would need to charge $6.50 per trip plus running and maintenance costs. If it covered only running and maintenance costs, the government would be kicking in $6.50 per trip. If it carried as much traffic as the entire RedBus network.

But I almost certainly have those numbers wrong. There's no way anybody would be advocating the rail line if those numbers were correct. So please don't quote me on them as I'm certainly wrong. Please run them yourself - there are any number of online calculators for the present value of an annuity. Plug $37.47 in as the annual payment with an interest rate of 8% and a 25 year term. 8% is Treasury's recommended discount rate on infrastructure projects. If you can convince people to buy the bonds for a 4% return, the annual payment is instead $25.6 million, the daily costs $70,100 and we would need only 7000 daily riders to have a $10 per passenger subsidy. At the end of 25 years, the City would hold an asset free and clear, but we'd also need to account for maintenance and upkeep over the period. Please draw your own conclusions about likely ridership, what would be an appropriate per-passenger subsidy, and whether rail then would be a good idea. I'm just putting up some of the parameters. I'm sure I have something wrong here and that rail is the best possible thing in this the best of all possible worlds.

The draft Christchurch City plan would increase the density of a smaller downtown, but only to a maximum building height of six or seven stories. The process for going from six to seven or more stories requires proving your building meets a tougher building code. Fair enough, you might think: tall buildings impose earthquake externalities on neighbours and so ought to have stronger foundations. But that's not what's in the plan; instead, you get to go taller if you have enough gardens on your roof and solar panels. Glaeser writes:

First, cities should replace the lengthy and uncertain permitting processes now in place with a simple system of fees. If tall buildings create costs by blocking out light or views, then form a reasonable estimate of those costs and charge the builder appropriately. The money from those fees could then be given to the people who are suffering, such as the neighbors who lose light from a new construction project.

I don’t mean to suggest that such a system would be easy to design. There is plenty of room for debate about the costs associated with buildings of different heights. People would certainly disagree about the size of the neighboring areas that should receive compensation. But reasonable rules could be developed that would then be universally applied; for instance, every new building in New York would pay some amount per square foot in compensation costs, in exchange for a speedy permit. Some share of the money could go to the city treasury, and the rest would go to people within a block of the new edifice.

A simple tax system would be far more transparent and targeted than the current regulatory maze. Today, many builders negotiate our system by hiring expensive lawyers and lobbyists and buying political influence. It would be far better for them to just write a check to the rest of us. Allowing more building doesn’t have to be a windfall for developers; sensible, straightforward regulations can make new development good for the neighborhood and the city.

Glaeser also writes sensibly on heritage preservation, arguing that heritage committees should face a capped maximum number of buildings that could be deemed to be of protected status. Otherwise, such committees will always over-reach, over-designate, and spread resources too thinly. We saw more than a bit of this in pre-quake Christchurch: too many designated buildings so too few had substantial earthquake protection; in some cases, heritage designation prevented or hindered adequate earthquake-strengthening instead of drawing public funds to assist in preservation. In an alternative world where only the best couple dozen buildings were designated of historic importance, public funds could have been devoted to ensuring their earthquake-readiness.

The Christchurch plan simultaneously demands medium-intensity downtown development while stifling any substantial development outside of downtown (to encourage downtown redevelopment). Worse, businesses that have cobbled together alternative arrangements in the suburbs may face zoning scrutiny in the next couple years intended to force them back downtown. Glaeser writes "If cities can't build up, then they will build out. If building in a city is frozen, then growth will happen somewhere else." Developers will be prevented from substantially building up downtown while being prevented from building out within city limits. I worry growth may well then just leave Christchurch. Yeah, some folks claim they'd never be willing to work or live in a tall building again, but aren't developers are the ones best placed for assessing public demand? Did people abandon skyscrapers in San Francisco?

A couple final notes:

The businesses that worked damned hard to re-establish themselves outside of downtown will be punished for having done so under rules effectively forcing them to move back downtown.

It would be mighty nice if Council could see fit to allow smaller subdivided lots and ease up the green belt restrictions around town so that the thousands of folks whose land has been deemed unremediable can afford to build on sections in Christchurch rather than leave town. Yeah, this will reduce demand for the downtown urban apartments where the planners want people to live eventually. But the folks in Kaipoi (and elsewhere) need houses within the next year and there's no chance of downtown housing options being available anytime soon.

* This post was written entirely on my own time on a Sunday. While I have never represented that anything on this blog reflects any views of the University, I particularly specify here that nothing in this post reflects anything that I would write in my capacity as an employee of the University of Canterbury. For purposes of this post, I am only an interested resident of Christchurch. Every one of the numbers presented is almost certainly incorrect and readers are encouraged to form their own assessments.

5 comments:

I'm also trying to make sense of the railway idea. The total university population is less than 20,000 people including staff and students. If one doesn't work or study in the university there aren't many reasons to come to campus on a regular basis.

Most students live a short distance from the university, so they can walk, ride a bicycle or skateboard to study, saving on transportation costs. In addition, the university has six halls of residence with room for around 2,000 students, which are at undersubscribed at the present. I would think that the university may prefer to get students paying to stay there.

Most members of staff do not live in the city center and it would be unlikely that they would move there.

If students live in or around campus there are three supermarkets, one of the largest shopping malls of the South Island plus all the cool shops in Church Corner within walkable distance.

Currently, there are 4 bus routes going from the university to the city center: 3, 21, 23 and Metrobus, which carry anything near full capacity only at peak hours.

I have to say that I am still struggling to make sense of $400M plus running costs.

I can imagine new young hires moving downtown. We looked downtown when we first got here but we could only find crummy flats and really pricey condos. But a rail link would have been utterly inframarginal.

The downtown to campus commute is no more than 20 minutes. Even on the day of the February earthquake, it took me 20 minutes to get to the edge of downtown. Five hours to get from the west end of downtown back home, but still. You have to put a heck of a lot of value on shaving a few minutes off a commute to make rail worthwhile.

If you are going to 'eventually' build a light rail, the first stage at a minimum should be from central city to airport.The airport would guarantee some level of usage from business park workers and tourists. Before construction even begins the proposed route would need to be zoned so as to allow a higher density of living than is presently the case. I wouldn't see this as a problem particularly around the University area. Probably best to get the metrobus network operating to standard and then determining where the demand and growth is occuring.

Would be interesting to see the economics of tramways in a city like Bern, Switzerland which has a smaller population than Chch, albeit living at higher density. I suspect having a cohesive national and local train network helps somewhat in that these tramways aren't standalone.

The six or seven story height limit seems a bit arbitrary and potentially problematic for downtown hotels (should they rebuild at a later date). CTV was six stories and many of the older buildings that maimed were of stone/masonary construction. Not suggesting we should build Taipai 101, but it seems to me that taller buildings can afford to be more innovative in earthquake design and features etc.

@V: Imagine that the line to the airport cost no more than the line to the University. The daily required traffic to cover the cost then doesn't change, just the plausibility of getting that level of traffic. At a 4% interest rate, you still need ridership just under that on the entire RedBus network to get the capital cost per rider down to $5.

Note that SuperShuttle charges $60 to get a group of 10 or 11 from the airport to downtown; that presumably covers their wages, maintenance, fuel, repairs, and initial capital outlay. $6 per head for a group booking.

Not saying it needs to be built right away, obviously there are private transport solutions that are more economic at the moment. However the potential routes should be designated in some long term plan to avoid what normally happens (i.e. nothing). Then we end up with the Auckland/Sydney situation where you need to go underground at 10x the price.